Together with the gradual shift from a state-owned centralised model towards an open-market, the boost of foreign direct investments in the Romanian economy has confirmed the growing interest of foreign capital in an emerging medium-size European market.
In order to keep the pace with investments' dynamics, the local legislative framework underwent substantial adjustments. Two main factors positively tailored this legislative evolution during the last decade. Firstly, special statutes governing privatisation process created the setting for substantial divestment of the Romanian State from the economy. Between 2000 and 2006, significant privatisation transactions were concluded in strategic areas ranging from natural resources to the steel industry, and from the banking to energy sectors. Secondly, Romanian legislation underwent a fundamental transformation as part of the Romania's effort to join the EU. By 2007, virtually all legislative areas had been gradually synchronised with the acquis communautaire which further created the prospect of an investor-friendly environment.
Further to significant cash flow adjustments imposed by the global downturn, latest data and trends indicate a new investment focus on several industries of the Romanian economy. While various legislative steps have been taken to encourage investments in such sectors, some of them remain rigorously regulated and foreign investors need to consider regulatory restrictions when planning expansion in such areas.
Energy
Energy is undoubtedly the most vibrant sector in Romania, given the country's commitments to replace or modernise its communist-era obsolete power production and transportation facilities and to progress toward a greener energy sector.
Among the main beneficiaries of stimulant measures approved at EU level for producers of energy from renewable sources, wind-farm developers are worth noting. Nevertheless, the implementation of such projects is relatively cumbersome, as investors need to pursue procedures such as (i) obtaining the power location endorsement; (ii) obtaining connection to the power grid; and (iii) obtaingin set-up authorisation from the National Regulatory Authority in the Energy Field.
Some large greenfield wind farms have already been finalised, with several other ventures expected to start operation in the near future. A huge wind farm was developed by the local branch of CEZ group in the south-eastern villages of Fantanele and Cogealac. When fully operational, this investment will represent the largest European wind farm and comprise of 240 turbines generating almost 600MW of green electric power, further to €1.1 billion ($1.52 billion)worth of investment.
A second highlight is the prospected Azerbaijan-Georgia-Romania-Interconnection (AGRI) project, aimed at transporting liquefied gas across the Black Sea into the EU. The deal envisages transporting gas from Azerbaijan to Georgian ports where it is liquefied and shipped across the Black Sea to a re-gasification terminal at the Romanian port of Constanta, and then to be further distributed across EU. The project is undergoing a financial and technical feasibility assessment.
Another significant investment worth mentioning is the envisaged €1 billion Tarnita-Lapustesti Hydropower Plant. This plant will have a vital role in balancing the national energy system: at times of low energy demand it would use excess electricity produced from nuclear and wind sources to pump water uphill to be further used as a hydro source for the generation of additional power. Technical studies are also in progress for this project.
Natural resources
One of the areas which particularly draw investors' attention is the mineral resources field. While natural mineral resources are the exclusive object of public propriety, many technologically-outdated State-run mining operations have historically proven ineffective.
A mining project commences upon the issuing of an exploration and, subsequently, an operation mining licence, further to the performance of a competitive procedure. As mining projects typically involve operations with potential environmental impact, the most crucial phase in implementing them is obtaining an environmental agreement from the competent authority. Such administrative deed is issued further to the investor performing a complex impact assessment on each environmental factor potentially affected by the project (such as water, soil, waste management, biodiversity, and so on) and proposing efficient protection measures.
Global players have showed interest in providing technological knowledge and financial strength for the develop of large mining projects in Romania.
The most significant investment in the Romanian mineral resources field is the project developed by Gabriel Resources (Jersey) in the gold-rich area in Rosia Montana. The project is structured as a joint-venture with a State-owned mining company. The venture's vehicle company obtained the mining licence and is undergoing the final stages of a complex environmental impact assessment procedure in order to obtain an environmental agreement and further, the building permit for construction of the mine.
When implemented, the project will be the biggest mining project in the region and the largest direct investment in the Romanian economy, with estimated direct and indirect benefits to the Romanian economy amounting to $4 billion. The mining project is particularly needed since the Rosia Montana is an underdeveloped region with high unemployment. During the operation phase the project is expected to generate approximately 3,000 jobs.
Apart from this project, another mining operation licence (in Certej) and several other exploration licences have been issued on other potentially gold-rich sites.
Banking
In line with the European Union principle of freedom of movement of goods and services, foreign entities may directly operate in Romania's banking field without being required to follow a local authorisation procedure and observe the capital requirements applicable to Romanian entities, provided that such entities are duly authorised and operating under the supervision of financial regulatory authorities in an EU or European Economic Area. Such credit institutions may operate based upon only a notification to the National Bank of Romania (NBR).
As regards acquisition of banks, any potential investor intending to acquire, either directly or indirectly, 10% or more of the share capital of a credit institution, or to increase such qualified participation so as to reach or exceed the thresholds of 20%, 33.3%, 50%, or to make the target entity a subsidiary of the investor, needs to make a prior notification to the NBR. The NBR has a 60-day period in which to evaluate the entire documentation. The procedure may be finalised with a positive endorsement from the NBR in the case when the prospected acquisition can be completed. The NBR also has the power to oppose the prospective acquisition and can issue a ruling whereby it details the reasons grounding the refusal; the transaction cannot then be carried out
Rules shaping investment establishment
Corporate
Business activities are usually carried out in Romania through companies which may be owned without any restrictions by residents or foreign shareholders. The only notable restriction to foreign acquisitions is the prohibition on buying land. Foreign entities or individuals typically avoid such restriction by setting-up a Romanian vehicle company.
The types of companies most frequently incorporated in Romania are joint-stock companies and limited liability companies, especially due to the limitation of the shareholders' liability to the value of their subscribed shareholding. Nevertheless, the latest amendments to the Companies Law implemented the principle of piercing the corporate veil, by virtue of which any shareholder taking illegitimate advantage of the limitation of its liability and the distinct personality of the company with the view of deceiving the company's creditors will be held liable without limitation for the company's outstanding debts.
Joint-stock companies must have at least two shareholders, whether individuals or legal entities. The minimum share capital is RON90,000 (€21,000). Contributions to the company's share capital may be in kind, in cash and/or in receivables. Cash contributions are always mandatory upon the company's establishment. In-kind contributions must be evaluated and effectively delivered to the company (the company being given a real right over the property, such as ownership, or usufruct). Notably, in some industries, such as banking or insurance, only cash contributions are allowed.
Limited liability companies are simpler and more flexible undertakings. They can have only one shareholder and in no case more than 50 shareholders. In order to avoid dilution of the shareholders' liability, the law provides that an individual or a legal entity may be a sole shareholder only in one limited liability company. Also the sole shareholder of a limited liability company may not be itself a limited liability company owned by a sole shareholder.
As opposed to joint stock companies the minimum share capital is significantly lower amounting to RON200 (approximately €50). Only cash and in-kind contributions to the share capital are allowed, the contribution in receivables being prohibited.
Certain reflections of EU norms in Romania's corporate law should also be highlighted:
a) Further to Romania's accession to the EU on January 1 2007, business activities may be carried out under the so-called fundamental freedoms which create the legal framework necessary for a functional EU Internal Market. These are: (i) the freedom of establishment (which enables an economic operator to carry out business activities in a stable and continuous manner in one or more Member States; and (ii) the freedom to provide services enabling players acting in one Member State to offer services on a temporary basis in another Member State, without having to establish itself also in the second state.
b) In accordance with Council Regulation (EC) No 2157/2001, Romania created a legal environment for the incorporation and authorisation of the European companies, free from obstacles arising from disparities and limited territorial application of the national company law.
c) Romania also implemented European regulations on cross-border mergers. Romanian limited stock partnerships, joint-stock companies or limited liability companies, as well as European companies headquartered in Romania may take part in cross-border mergers.
State incentives
Within the strict limits of EU rules on state aid, the Romanian State periodically launches incentive schemes for correcting market failures and stimulating economic priorities such as regional development, training of personnel, reducing unemployment, R&D objectives, and so on. State aid may also be available on an ad hoc basis for individual investment projects fulfilling the development objectives targeted by the State in a given geographical area or economic sector.
The award of State-aid resources potentially affecting trade between Member States of the European Union requires, as a rule, prior notification to and authorisation by the European Commission.
The Commission's approval is not required for state aid measures which fall under certain minimis thresholds or which have the benefit of the safe harbour provided by the European Commission's block exemption regulations.
State aid may be granted based on either State-aid schemes (for multiple beneficiaries), or as ad hoc aid (individual awards granted in absence of a scheme). While State aid schemes may be implemented under the General Block Exemption Regulation, and thus do not require further approval by the European Commission, individual ad-hoc aid is only exceptionally available without the Commission's green light.
The State-aid schemes available in Romania are mainly targeted at regional aid for new investment projects, as well as on training of personnel and R&D objectives. The large majority of public support targets small and medium-size enterprises, but large investment projects establishing start-ups or new, modern lines of business are also strongly encouraged. Under such schemes, the aid generally targets regional development and consists of direct grants provided by the Ministry of Public Finance for initial investments, comprising (i) an investment in material and immaterial assets relating to the setting-up of a new establishment; (ii) the extension of an existing establishment; (iii) diversification of the output of an establishment into new additional products; and (iv) a fundamental change in the overall production process of an existing establishment.
Under the regional aid schemes, the aid recipient must, among other things, not be in financial difficulty and/or it should not have any debts towards the state budget and should not have been subject to a State-aid recovery decision. In principle, the aid schemes apply to enterprises from all sectors but some of the following categories are exempted/ subject to special rules: primary production in agriculture (listed in Annex 1 of the TFEU), fishing, coal industry, metallurgy, transport, construction of ships and synthetic fibre.
Depending on the nature, line of business, size and duration of the contemplated project, individual aid packages could also be negotiated with the relevant State bodies, notably local authorities. However, since such dedicated measures depend largely on political factors, and may require prior notification and authorisation by the European Commission, the already available incentives could be more directly accessed for the contemplated investments.
Pre-closing and operational mattters
Antitrust clearance
Share capital/assets acquisition generating direct or indirect control over a local entity, as well as the merger of two or more previously independent parties, qualifies as an economic concentration and may trigger a notification obligation and applicable clearance requirement in the competent jurisdiction. In merger cases, a division of competence between the European Commission and the national authorities applies. The Commission has exclusive power to examine concentrations with a Community dimension (the one-stop-shop principle), while the Competition Council assess concentrations with a national dimension.
Should the merger not fall under the jurisdiction of the European Commission, it would require clearance by the Competition Council if the following thresholds are cumulatively met in the fiscal year preceding the transaction:
a) the parties' combined worldwide turnover exceeds €10 million; and
b) at least two of the parties involved in the transaction have a turnover in Romania exceeding €4 million.
Romania is considered to be a suspensive jurisdiction, that is a transaction may not be implemented before clearance is issued by the Competition Council. However, the buyer may close the transaction pending clearance provided that it does not take any measures deemed as irreversible with regard to the target's operations. For justified cases, the buyer may also ask for a derogation from the above rule.
The Competition Council will issue a decision to either authorise the merger, or open an in-depth investigation within 45 days after it declares the filling complete. In practice, the review period (phase I) is likely to take up to two or three months, since the authority usually takes at least 15 to 25 days before it declares the submission complete and the statutory time starts to run. In certain cases, a simplified procedure is available. In such case, the parties submit the notification under a simplified form and the review period may be shortened to below two months.
Acquisition of listed entities
Transactions targeting companies admitted to trading on local regulated markets have to observe specific capital market regulations. The operation of the Romanian capital markets is placed under the supervision and authority of National Security Commission. Transparency requirements of the capital market trigger various reporting and publication obligations. Thus, shareholders reaching or divesting from a qualified position (5, 10, 15, 20, 25, 33, 50, 75 or 90%) are obliged to inform the target company, the Commission and the market operator of such operation within three working days.
Specific rules are to be observed with regard to takeover offers. Thus, in certain cases (a person has reached either alone or jointly with persons further to concerted actions more than 33% of the voting rights over the issuer company), the shareholders are obliged to launch a public offering addressed to all the other shareholders for all the remaining shares.
Capital market regulations also provide specific squeeze-out rules applicable in respect of the minority shareholders. Such rules apply either when the majority shareholder has reached 95% of the share capital and of the voting rights in the listed company, or acquired 90% of the share capital and the shares targeted in a public purchase offering addressed to all the shareholders for all their shares. Such rules are not applicable to non-listed entities.
Tax matters
In principle, foreign entities are subject to tax in Romania only on income derived from Romanian operations (at a rate of 16%). As of Romania's EU accession on January 1 2007, dividends paid by Romanian companies to companies resident in one of the EU/EFTA member states are exempt from withholding tax if the dividend beneficiary has held a minimum of 10% of the shares of the Romanian company for an uninterrupted period of at least two years elapsed at the date of payment. If the minimum shareholding and period are not fulfilled at the date of payment of the dividends, a 10% withholding tax rate applies to dividends paid out by a Romanian company to shareholders who are tax resident of these states. Dividends paid out to companies outside the EU and EFTA are subject to the standard 16% withholding tax rate. If the dividend payments are made to a beneficiary resident in a country with which Romania has concluded a double taxation treaty and that beneficiary presents a valid tax residency certificate, then the withholding tax rate provided under the Romanian domestic law can be reduced in accordance with the relevant article of the treaty.
Exit and investment protection
Typically, investment exit is performed through share-deal transactions. Tax on capital gain (16%) is, in principle, applicable. Non-residents may appoint a tax representative to fulfil tax compliance obligations. Voluntary dissolution of Romanian companies is legally possible with approval from a majority of qualified shareholders. A specialised liquidator will be appointed to allocate the net assets. The company's creditors are entitled to oppose such operation. In certain cases shareholders are entitled to decide the allocation among them of the company's assets (provided all the company's debts are settled).
The Romanian legal system provides for various guarantees protecting investments. The Romanian Constitution specifically prohibits discriminatory nationalisation of private property and establishes the rule that expropriation can be performed only for a public utility cause and only with just and prior compensation.
Moreover, Romania has ratified the Washington Convention on the Settlement of Investment Disputes between States and Nationals of Other States. In addition, Romania has ratified more than 80 bilateral investment treaties with various countries.
The substantive and procedural means of protection available to investors under these treaties are manifold. Such guarantees refer mainly to a full security of the investments, protection against expropriation and nationalisation measures without due process, the right of the investor to a fair and equitable treatment as well as the benefit of the most favoured nation treatment. In regard to arbitration clauses, the general practice is to include in treaties access to investment arbitration by Icsid, although in some cases the recourse to arbitration is an option available to the investor along with the right to initiate proceedings in the local courts of law. The most recent bilateral investment treaties also include the option to refer the dispute to ad hoc arbitration under the Uncitral Rules.
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About the author
Stefan Damian, deputy managing partner at Tuca Zbârcea & Asociatii, regularly represents investors (multinational corporations active in steel, oil, mining, telecoms and pharma, as well as financial institutions, investment and private equity funds) in M&A/post-privatisation issues, and specific capital markets, banking and finance and corporate/regulatory matters. For the past 13 years, he has assisted large investors across different sectors in all stages of direct investment in Romania, especially in joint ventures and greenfield operations, such as the biggest mining project in Europe with investments worth up to $4 billion and a greenfield investment in southeast Romania worth e7 billion. Damian also heads the firm’s capital markets practice group, having coordinated many key landmark projects, such as the first listing of an international company |
Contact information
Stefan Damian
Tuca Zbârcea & Asociatii
Victoriei Square
4-8 Nicolae Titulescu Ave.
America House, West Wing, 8th Fl
Sector 1, 011141 Bucharest
T: +40 21 204 88 90
F: +40 21 204 88 99
E: office@tuca.ro
W: www.tuca.ro |
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About the author
Horia Ispas is managing associate at Tuca Zbârcea & Asociatii, and specialises in M&A and privatisation, as well as corporate and commercial matters. He was involved in a large number of private transactions and privatisation procedures regarding significant state-owned companies, drafting and negotiating the underlying documentation including share sale-purchase agreements, joint-venture agreements, and pledge agreements.His practice also includes legal assistance to large Romanian and foreign companies with a particular view to implementing and developing their activity in Romania, counselling on specific corporate operations, as well as negotiation of various commercial agreements. |
Contact information
Horia Ispas
Tuca Zbârcea & Asociatii
Victoriei Square
4-8 Nicolae Titulescu Ave.
America House, West Wing, 8th Fl
Sector 1, 011141 Bucharest
T: +40 21 204 88 90
F: +40 21 204 88 99
E: office@tuca.ro
W: www.tuca.ro |